Lenders Mortgage Insurance, commonly referred to as ‘LMI’, is an insurance that covers a Lender should a borrower default on their loan and the lender incurs a loss.
As a general rule LMI is payable on Home Loans where the loan to valuation ratio (LVR) is greater than 80% and allows borrowers purchasing property to potentially gain a loan at up to 95% of the purchase price of a home.
While borrowers do not get a direct benefit from LMI it does enable them to purchase a home with a smaller deposit, therefore potentially enabling purchasers to get into their own home sooner.
How much does LMI Cost?
Unfortunately there is not a set premium on the cost of LMI. The premium is calculated on the amount of the loan and the LVR. Generally the higher the loan insured and the higher the LVR, the greater the LMI premium will be. As an example;
– On a $400,000 loan with an LVR of 95%, the LMI Premium would be approx $14,500#.
– By comparison, on a $400,000 loan with an LVR of 90%, the premium would reduce to approximately $8,000#
The important point being the greater the equity and lower the LVR, the lower the LMI premium will be.
Does LMI need to paid in cash?
No, most lenders enable the LMI premium to be capitalised (added on) to the loan. This obviously increases the amount of your loan and therefore means that you are also paying interest on this amount.
However by capitalising the premium it does mean that borrowers can get into a home sooner rather than saving the additional funds.
How often is LMI paid?
Unlike a traditional insurance product, LMI is a once only premium that is payable at settlement of your loan.
Do all Lenders charge LMI?
Traditional Bank, Credit Union and Building Society lenders will all charge LMI as a general rule when the LVR is over 80%. Occasionally some may only require LMI at LVR’s above 85% as a special offer, but these offers are infrequent.
There are some non-traditional lenders that require a payment of a Lenders Protection Fee rather than LMI, however such lenders are also likely to offer different loan terms and often higher interest rates.
How do I find out more about my situation?
To assess your own individual situation or find out more about LMI you should contact your local Finance Broker or Lender.
If you are considering purchasing a property in the short to medium term I would highly recommend that you meet with a local Finance Broker first to understand all costs and fees associated with buying a property.
# Please note premiums detailed above are approximate only and can vary from Lender to Lender. For a more accurate quote on your specific loan please contact your Finance Broker or Lender